Monday, November 28, 2011

FYI: Cal App Says Servicer Not Estopped By Partial Performance on Loan Mod, Did Not Violate "One Form of Action" Rule

The California Court of Appeal for the Second District recently held thata servicer's acceptance of reduced payments did not constitute acceptanceof a loan modification agreement proposed by borrowers, and further heldthat the servicer did not violate the "one form of action" rule.

After the borrowers defaulted on their home loan, they executed a documenttitled "Loan Workout Plan" (the "Workout Plan"), which provided that itwould not be effective absent execution by the lender. The lender neverexecuted the plan. The Workout Plan required, among other things, thatthe borrowers submit various financial information to the lender.

The borrowers made four payments pursuant to the Workout Plan. Two ofthese payments were accepted by the servicer, and two were returned to theborrowers after they failed to submit required financial information.

The servicer notified the borrowers that the Workout Plan was terminated,and foreclosed on the property. The borrowers challenged the foreclosuresale, and the lower court entered an order of summary judgment in favor ofthe servicer and lender. The borrowers appealed.

As you may recall, the so-called "one form of action" rule in Californiaprovides that "[t]here can be but form of action for the recovery of anydebt or the enforcement of any right secured by mortgage upon realproperty." Cal. Code of Civ. Proc. Sec. 726(a).

On appeal, the borrowers contended that the Workout Plan was anenforceable contract, and that the servicer and lender were equitablyestopped from raising a statute of frauds defense, due to the fact thatthe servicer accepted the reduced payments the Workout Plan provided for.The borrowers further contended that the servicer and bank violated the"one form of action" rule, by accepting the reduced payments and applyingthem to the unpaid principal balance of the loan.

The Court rejected both arguments. It noted that neither the servicer northe lender executed the Workout Plan, and further noted that the borrowersfailed to provide the bank with their financial information, as requiredby the Workout Plan. The Court also placed emphasis on the fact that thelender and servicer requested financial information from the borrowers'counsel on three separate occasions, without receiving any response.

The Court held that under these circumstances, "principles of equitableestoppel do not apply because neither [the servicer] nor [the lender] ledthe [borrowers] to believe that a permanent loan modification wasforthcoming."

The Court also rejected the borrowers' argument that the servicer andlender violated the "one form of action" rule. The Court based itsdecision on the fact that the borrowers "voluntarily paid monthlypayments.in hopes of obtaining a loan modification," and that in exchangefor these payments, the servicer and lender "suspended further foreclosureperiods for approximately six months." Therefore, the Court stated that"[w]e do not consider the payments a set-off manifesting an election tonot foreclosure pursuant to the one-form-of-action rule," and affirmed thejudgment of the lower court.

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Ralph Wutscher's practice focuses primarily on representing depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, distressed asset buyers and sellers, loss mitigation companies, automobile and other personal property secured lenders and finance companies, credit card and other unsecured lenders, and other consumer financial services providers. He represents the consumer lending industry as a litigator, and as regulatory compliance counsel.

Ralph has substantial experience in defending private consumer finance lawsuits, including cases ranging from large interstate putative class actions to localized single-asset cases, as well as in responding to regulatory investigations and other governmental proceedings. His litigation successes include not only victories at the trial court level, but also on appeal, and in various jurisdictions. He has successfully defended numerous putative class actions asserting violations of a wide range of federal and state consumer protection statutes. He is frequently consulted to assist other law firms in developing or improving litigation strategies in cases filed around the country.

Ralph also has substantial experience in counseling clients regarding their compliance with federal laws, and with state and local laws primarily of the Midwestern United States. For example, he regularly provides assistance in connection with portfolio or program audits, consumer lending disclosure issues, the design and implementation of marketing and advertising campaigns, licensing and reporting issues, compliance with usury laws and other limitations on pricing, compliance with state and local “predatory lending” laws, drafting or obtaining opinion letters on a single- or multi-state basis, interstate branching and loan production office licensing, evaluations and modifications of new or existing products and procedures, debt collection and servicing practices, proper methods of responding to consumer inquiries and furnishing consumer information, as well as proposed or existing arrangements with settlement service providers and other vendors, and the implementation of procedural or other operational changes following developments in the law.

Ralph is a member of the Governing Committee of the Conference on Consumer Finance Law. He is also the immediate past Chair of the Preemption and Federalism Subcommittee for the ABA's Consumer Financial Services Committee. He served on the Law Committee for the former National Home Equity Mortgage Association, and completed two terms as Co-Chair of the Consumer Credit Committee of the Chicago Bar Association.

Ralph received his Juris Doctor from the University of Illinois College of Law, and his undergraduate degree from the University of California at Los Angeles (UCLA). He is a member of the national Mortgage Bankers Association, the American Bankers Association, the Conference on Consumer Finance Law, DBA International, the ACA International Members Attorney Program, as well as the American and Chicago Bar Associations.

Ralph is admitted to practice in Illinois, as well as in the United States Court of Appeals for the Seventh Circuit, the United States District Courts for the Northern and Southern Districts of Illinois, and the United States District Court for the Eastern District of Wisconsin, and has been admitted pro hac vice in various jurisdictions around the country.